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Forget the most wonderful time of the year. For Mattel and Hasbro, it’s the most stressful. The toy giants are entering the holiday season — which accounts for a whopping 40 percent of their annual revenue — trying to win a larger piece of a limited market.

According to estimates by Euromonitor, the U.S toy market has generated sales ranging from $17 billion to $20 billion between 1998 and 2012, fluctuating between growth and decline any given year. In 2013, it’s forecast to be worth $19.9 billion.

But in the search for new revenue sources, the giants are creeping onto one anothers’ traditional turfs. Hasbro, maker of Transformers and G.I. Joe, is starting to focus more on girls’ toys, where Mattel has dominated for years; No. 1 Mattel is investing more in content and entertainment, where Hasbro is ahead of the game. At the same time, the No. 1 and No. 3 players are wrestling for consumers’ wallets with smaller toymakers, tech products and private-label brands.

Meanwhile, Denmark-based Lego, the No. 2 toy maker by revenue behind Mattel, chooses mainly to focus on the building-blocks aisle. Compare that to its American counterparts that own, between them, Barbie, American Girl, Furby, Fisher-Price, Hot Wheels, My Little Pony, Monopoly and scores more. Stephanie Wissink, principal and senior research analyst at Piper Jaffray, who covers teen and youth retail and children’s products, estimates that Mattel and Hasbro account for 60 percent of the U.S. toy industry.

Because of its focus on boys, Wissink said Hasbro depends on what she calls a “hit-driven” cycle — maximizing gains when movies for franchises like “Transformers” or “Star Wars” come out, and hunkering down and riding that profitability during years without such movies. With a relative lack of movies this year, the strategy resulted in a 17 percent sales slump to $392 million for its boys’ toys in the third quarter.

Hasbro Chief Marketing Officer John Frascotti said that while there’s “no arguing the power of a tent-pole movie,” in “down” years the company will push entertainment extensions, like TV shows, theme-park rides and comic publishing. “And when you look at ‘Avengers’ or other licensed properties, our partners at Disney are doing the same thing,” he said. “The business is less lumpy that way.”

Hasbro spent 10 percent of net revenue, about $422 million, on advertising in 2012, compared with $414 million, or 9.7 percent of revenue, in 2011. It said the increase was to offset lower sales in entertainment-based properties, which “do not require the same level of advertising the company spends on non-entertainment products.” Hasbro has also been shaking up its agencies: It awarded its creative account to Grey, New York, after six years at Uproar, an Omnicom youth-marketing agency. Recently, it consolidated most of its media business at Omnicom’s OMD.

The company is also putting more stock into girls’ brands, which saw a 29 percent jump in sales in the third quarter. After the success of TV show “My Little Pony: Friendship is Magic,” (which at one point had a substantial male following) Hasbro decided to extend the brand for older girls. That resulted in “Equestria Girls,” a show and doll line that leans into what Frascotti calls “more advanced topics for girls.”

“That’s what you do in a market that doesn’t have huge growth,” he said.

Hasbro also extended its Nerf brand into girls’ territory by creating Nerf Rebelle — the same shooters and projectiles it markets to boys, but in prettier packaging. “[Nerf Rebelle] is an example of identifying an underserved or white-space opportunity in a market like the U.S., which is low growth,” said Frascotti. “We noticed that while there were a lot of active-play opportunities for boys, there weren’t as many for girls. And girls today are different than girls 20 years ago.”

With “Transformers: Age of Extinction,” Marvel’s “Captain America: The Winter Soldier” and “Guardians of the Galaxy” slated for 2014, Hasbro can look forward to a bumper crop of movie-related sales next year. The Toy Industry Association said licensing will continue to be an important trend, with 2014 expected to be the “strongest year in recent history” for toys tied to movies.

For its part, Mattel has spent around 11 percent of its net sales over the past few years on advertising and marketing, spending $717.8 million in 2012. It has historically been focused on girls’ toys, with Barbie, American Girl and Monster High under its belt. Barbie sales in the third quarter were up 3 percent, keeping pace with other girls’ toys sales.

Lisa McKnight, senior VP-U.S. marketing at Mattel, said the maturity of the U.S. market has led her company to look at some segments of the population a “little more deliberately.” For example, it’s targeting millennial moms for infant brand Fisher-Price in an effort to “get her out of the gate, then graduate her into the girls’ and boys’ business.” Mattel is also targeting Hispanic moms with the “Toy Feliz” campaign, which recognizes how hard Latina moms work to keep families happy.

Outside threats

Mattel and Hasbro have a lot more than just rival toymakers to worry about. As kids get older, tech companies like Apple and Microsoft become competitors, not least because they create devices that capture a child’s imagination more than a doll or action figure might.

In its 2012 annual report, Mattel identified the phenomenon of kids outgrowing traditional toys at a younger age as a risk factor for the company. But it also flagged an “increasing use of sophisticated technology in toys.” That raises a new challenge. For example, Hasbro, the maker of popular ’90s toy Furby, last year announced a revamp of the furry creature, giving it high-tech upgrades that included an ability to sync with iPad apps. Hasbro also recently introduced “Telepods,” little action figurines that let players port in characters into the digital game “Angry Birds Star Wars.”

McKnight said Mattel is trying to invest in content for its brands via YouTube and gaming apps to make sure “our brands are transitioning into the space where kids are.”

Private label

Toymakers also compete against some of their biggest distributors. As Piper Jaffray’s Wissink noted, before the 2008 economic crisis, toys developed by Target, Toys “R” Us and Walmart were outselling Hasbro and Mattel brands. That changed when the crisis hit because Mattel and Hasbro took on more risk of cutting prices if the stock didn’t sell — something retailers weren’t willing to do. “In periods of economic risk, retailers gravitate toward vendors,” said Wissink.

As the economy improves, private-label threats increase again. “There will always be an opportunity for retailers to pursue private-label situations if they feel their needs are not being met,” said Frascotti.

With the cost of entry generally low, indie toymakers can also play a big role. Wissink estimated that 20 percent to 30 percent of U.S. toy sales are private-label and indie players. Other estimates have reached as high as 50 percent or more. Google Shopping’s top trending toy searches in November not only included Mattel’s Monster High and Hasbro’s Nerf Rebelle, but Rainbow Loom, an indie brand produced by a former engineer in Detroit.

Isaac Larian, CEO of indie firm MGA Entertainment, maker of Bratz Dolls and Little Tikes, said the Mattel-Hasbro duopoly doesn’t leave shelf space at giant retailers for small toys, keeping overall sales growth down. But in 2006, five years after introducing Bratz, MGA managed to do the seemingly impossible: bring Barbie’s 90 percent market share down to 60 percent. “You can do that if you innovate and there’s fair competition.”

Mattel’s McKnight said the online space is making it easier for smaller manufacturers to enter the market. “We embrace it, and it inspires us,” she said. “However, [competitors are] not what’s driving us to continue to improve and grow our business.”

Then there’s the ever-looming threat of the $19.8 billion video-game industry. With the launch of big gaming titles as well as the hugely anticipated Xbox One and Playstation 4 consoles, toymakers will be vying for share of parents’ pockets this holiday season with big-ticket items. Wissink pointed out that when the Nintendo Wii launched in November 2006, sales of toys went from flat to down 2 percent to 3 percent.

Content play

Both Mattel and Hasbro recognize that toys are just part of a larger play pattern, which means content around toys is more important than ever. There, Hasbro might have an upper hand, according to Sean McGowan, senior analyst at Needham & Co., who said “boys’ toys are very responsive to entertainment, while girls’ toys aren’t as much.” It makes sense then that Hasbro has owned half of a kids’ channel, The Hub, for years, and has been turning its toys, Transformers and G.I. Joe, into mammoth movie franchises.

Mattel, on the other hand, has been focused on more direct-to-market entertainment, like its 26 Barbie DVD titles, and Monster High on TV and the Web. But last year, it acquired HIT Entertainment, which owns Thomas & Friends and Barney, as well as production capacity. McKnight said it plans to “lean more heavily” into HIT to create content. It also introduced in-house studio Playground Productions.

The one problem both companies face is that unlike in the 1980s and 1990s, when toymakers could push shows on TV that were designed to simply sell toys (e.g. “He-Man”), networks have now decided they no longer want to be passive sellers of airtime. Instead, channels like Nickelodeon and Disney are creating their own shows and licensing the toys. “The strategy that worked [for Mattel and Hasbro] in the past doesn’t work anymore,” said McGowan.

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